Walgreen (WAG) reported an EPS of 49 cents in the fourth quarter of fiscal 2010, surpassing both the Zacks Consensus Estimate and the year-ago quarter by 5 cents.
However, results for the quarter included a penny towards restructuring cost and 4 cents for the Duane Reade acquisition. The fourth quarter in fiscal 2009 included 3 cents per share towards restructuring costs. For fiscal 2010, the company reported an EPS of $2.12, meeting the Zacks Consensus Estimate but ahead of $2.02 of fiscal 2009.
Net sales for the quarter increased 7.4% year over year to $16.9 billion, marginally beating the Zacks Consensus Estimate of $16.8 billion. While comparable store sales (those open for more than a year) increased 1.5% during the quarter, sales of front-end comparable drugstores increased 1.2%. For the full year, net sales increased 6.5% to reach $67.42 billion, marginally beating the Zacks Consensus Estimate of $67.38 billion.
Following encouraging results, shares were higher by more than 5% during pre-market trading.
Prescription sales, accounting for 65.9% of sales in the quarter increased 6.5%. Moreover, the company also increased its retail pharmacy market share by 60 basis points to 19.5% from the year-ago period.
Gross margin for the quarter at 28.4% increased 70 bps compared with the corresponding period last year, primarily driven by improved efficiencies coupled with lower restructuring expenses. The company has provided an update on its restructuring initiative, which met its goal of pre-tax savings of $500 million in fiscal 2010 and is on course for $1 billion in annual savings in fiscal 2011.
Although gross margin has improved, operating margin came down marginally to 4.42% on account of an 11% rise in selling general and administrative expenses. The increase was driven by the Duane Reade’s acquisition-related costs, new store openings, slightly offset by lower restructuring costs.
Walgreen generated $3.7 billion in operating cash flows for the fiscal 2010. At the end of the fiscal, the company had $1.9 billion in cash and cash equivalents, down from $2.1 billion at the end of May 2009. Based on a strong cash balance, the company completed $2 billion of share repurchase program announced in October 2009.
In order to make the best use of available funds, Walgreen has scaled down its plan of opening stores until 2011. We believe this decision will benefit the company as the new stores take 2 to 3 years to break even.
In order to enhance customer experience, Walgreen has adopted a strategy of customer-centric retailing (CCR). This refers to enhancing store formats, pricing, promotions, and vendor relationships to provide a better experience for the customer. Walgreen has converted or opened more than 1,500 stores to its CCR format and now has more than 1,800 stores with the new format.
We are currently Neutral on the stock.
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